Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.

Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.

Russ would like to apply for a $120,000 six-month loan bearing an interest rate of 6% per year. The unaudited financial reports of the company appear below.

Comparative Balance Sheet As of December 31 dollars in thousands) This Year Last Year Current assets: 275.0 S 167.3 105.0 270.0 40.0 Cash Accounts receivable, net 110.0 175.0 Prepaid expenses 33.0 593.0 Total current assets 582.3 250.0 Property and equipment 380.0 843.0 Total assets 962.3 Liabilities and Stockholders' Equity Current liabilities: 160.0 $276.0 Accounts payable Accrued liabilities 50.0 60.0 220.0 Total current liabilities 326.0 Long-term liabilities .0 .0 220.0 Total liabilities 326.0 Stockholders' equity Common stock and additional paid-in- 150.0 150.0 473.0 Retained earnings 486.3 623.0 Total stockholders' equity 636.3 843.0 Total liabilities and stockholders'equity $962.3